Fair Laboratory Practices Assocs. v. Quest Diagnostics, Inc.
734 F.3d 154, 36 I.E.R. Cas. (BNA) 1682, 2013 WL 5763181 (2013)
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Rule of Law:
An attorney's participation as a relator in a False Claims Act (FCA) qui tam action is subject to state ethical rules, and the attorney may not use or reveal a former client's confidential information beyond what is reasonably necessary to prevent an ongoing crime, particularly when non-attorney relators possess sufficient information to bring the suit.
Facts:
- Mark Bibi served as General Counsel for Unilab Corporation, a clinical laboratory company, from 1993 to 2000.
- During their employment, Bibi and other Unilab executives, including Andrew Baker (CEO) and Richard Michaelson (CFO), became concerned that Unilab's pricing structure constituted an illegal 'pull-through' scheme, offering commercially unreasonable discounts on non-federal business to induce referrals of lucrative Medicare and Medicaid business, potentially violating the Anti-Kickback Statute.
- In 1996, under CEO Baker, Unilab implemented a new pricing policy to address these concerns, but after profits fell and Baker departed, new management reverted to the prior aggressive pricing strategy.
- In early 2000, Bibi advised Unilab's new CEO that a recent government advisory opinion created an inference of illegality regarding Unilab's pricing; the CEO allegedly instructed Bibi to 'find a way around' it, and Bibi was replaced as General Counsel shortly thereafter.
- In 2003, Quest Diagnostics Incorporated acquired Unilab, making it a wholly-owned subsidiary.
- After the acquisition, Baker, believing he had been 'shortchanged' in an earlier stock sale, contacted Bibi and Michaelson to pursue a qui tam lawsuit against their former employer.
- In 2005, Baker, Michaelson, and Bibi formed Fair Laboratory Practices Associates (FLPA), a general partnership, for the sole purpose of acting as the relator in a qui tam action against Unilab and Quest.
Procedural Posture:
- Fair Laboratory Practices Associates (FLPA) filed a qui tam action against Quest Diagnostics Inc. and Unilab Corp. in the U.S. District Court for the Southern District of New York.
- After discovery concerning the role of FLPA partner and former Unilab general counsel Mark Bibi, defendants filed a motion to dismiss the complaint for violations of New York's attorney ethics rules.
- The District Court granted the motion to dismiss the complaint.
- The District Court also disqualified FLPA, its individual partners, and its outside counsel from bringing any subsequent action based on the same facts.
- FLPA, as plaintiff-appellant, appealed the judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does a former corporate general counsel violate New York's Rules of Professional Conduct by participating as a relator in a qui tam action against his former client and disclosing confidential information that is not reasonably necessary to prevent an ongoing crime?
Opinions:
Majority - Cabranes, J.
Yes, a former counsel violates New York's ethical rules under these circumstances. The False Claims Act (FCA) does not preempt state ethical rules that govern attorney conduct, meaning attorneys acting as relators must still adhere to their duty of confidentiality. While N.Y. Rule 1.6(b)(2) permits an attorney to reveal confidential information to the extent the attorney reasonably believes it necessary to prevent a client from committing a crime, that exception is narrowly construed. Here, Bibi's disclosures of confidential information went far beyond what was necessary to prevent any alleged ongoing crime in 2005. Crucially, the other partners in FLPA, Baker and Michaelson, possessed ample non-confidential information to bring the qui tam action on their own, rendering Bibi’s participation and disclosure of privileged information unnecessary. Because his disclosure of protected client confidences was not necessary, Bibi violated his ethical obligations under N.Y. Rule 1.9(c).
Analysis:
This decision establishes a critical boundary for attorneys acting as whistleblowers under the False Claims Act. It clarifies that the federal interest in uncovering fraud does not provide attorneys with a blanket immunity from state ethical obligations, particularly the duty of confidentiality owed to former clients. The court's narrow interpretation of the 'necessity' exception under Rule 1.6(b)(2) serves as a strong deterrent to in-house counsel participating as relators, especially when non-attorneys possess sufficient facts to bring the claim. This precedent forces potential attorney-relators to conduct a rigorous analysis of whether their disclosure is the only means of preventing a crime, thereby protecting the integrity of the attorney-client privilege even in the face of alleged corporate misconduct.
